The recent court case of William B. Gregory, et al., v. The United States Department of the Treasury – Internal Revenue Service, Case No. 1:12CV00042 in the Western District of Virginia, entered on Nov. 7, 2012, is one of those court cases that illustrates the “Buyer’s Beware” adage. The Gregorys found themselves liable for another person’s tax liabilities!
Joe and Betty Watson had purchased their residence as tenants by the entirety in 1981. In 2002, the IRS filed a federal tax lien of $200K against Joe Watson, attaching to his one-half undivided interest in his home. In 2003, the Watsons deeded the property to their daughter-in-law who assumed the mortgage on the property. In 2006, the daughter-in-law sold the property to William and Bettina Gregory. The mortgage obtained by the Watsons was paid off and the Gregorys used their own funds and their own mortgage to finance the acquisition of the Watson’s former home. The Gregorys spent $100K improving the home and entered into a contract to sell their home for $380K. During the process of completing this sale, the buyer’s title search discovered the federal tax lien and the IRS refused to discharge it for less than $190K, representing one-half of the sales price. The Gregorys argued that the IRS should only be entitled to $60K, the amount that would have been due the IRS had the lien been discovered when they purchased the home.
While the United States District Judge cited a multitude of VA and third circuit case findings as to how he reached his decision which makes for interesting reading, he ruled in favor of the IRS.
Reading this case, one wonders if the Gregorys will be successful should they seek recourse against their title company, did they purchase their title insurance from a title search company with an established history or did they let select the title search company with the lowest fee, and should home buyers check the county court records themselves before purchasing a home?
Please be sure to read the disclaimer page on our blog. This blog is for educational purposes only and should not be considered as the rendering of tax advice.
